Addicts may not respond to price incentives as we would expect. This problem, combined with the fear of disproportionally taxing the poor, makes it difficult to address the consumption externalities caused by addictive substances. This column reviews recent literature showing the efficacy of minimum pricing on alcohol, and the curious result that alcohol consumption now seems to be increasing in household income.

Related

Policymaking on addictive substances is a tricky business, since the choices of addicts should not be expected to follow the neoclassical view of consumer choice. The additional problems are many:

People have limited will power,

Time preferences tend to excessively favour the short run, and

Certain social norms can create an unhealthy social environment (e.g., “drinking is cool”, “alcohol is the fast way to relax”).

Under these circumstances, traditional incentives might not work the way we think.

Policymaking is further complicated by negative consumption externalities like second-hand smoke, behaviour associated with binge drinking, and other unhealthy behaviours. The standard Pigovian prescription is to impose taxes up to the point where prices reflect these social costs.

The minimum-price possibility

One soft way to tackle these issues – and avoid having to choose the right price – is to ban price discounts on alcohol. Indeed, in Britain the Labour party has proposed setting a minimum price on alcohol. But what is the evidence on the matter?

Inhibiting access

Setting a binding minimum alcohol price raises prices, which should lower consumption. The consumption responsiveness – i.e. the elasticity of demand – is not the same for all groups. In particular, younger adults tend to be more price-sensitive. Evidence suggests that raising alcohol prices can be an effective intervention to reduce access of the younger populations (Anderson and Baumberg 2006).

However, for this sort of policy to make a difference, and to avoid the ‘law of unintended consequences’, one needs to identify the target group and consider substitutes, . For example, it would be important to prevent a shift by youngsters to lower quality alcohol. This suggests a minimum price across the board – applying the policy to every type of alcohol – if one is to discourage substitution and hence achieve lower consumption by younger people.

Here evidence from Canadian province of British Columbia is encouraging. It suggests that the implementation of a 10% increase in minimum price results in a 16% decrease in consumption. (Stockwell and Thomas 2013). This brings other potential benefits such as an expected reduction in mortality, hospital admissions, criminal offences, and sick days, among other things.

Reassuringly, such policies are unlikely to fall disproportionately on low-income people. The reason is the so-called ‘alcohol income puzzle’ – the fact that there is a positive income gradient for moderate drinking (Costa-i-Font et al. 2014).

So what?

In short, recent proposals to set a minimum price on alcohol so as to discourage consumption are supported with empirical evidence. Higher across-the-board prices are likely to discourage consumption. Best yet, these interventions would appear to be cost-effective and not anti-poor.

References

Anderson, P and B Baumberg (2006), “Alcohol in Europe: A public health perspective”, Report for the European Commission.